P. Mohanarajan, Vice President : This appeal filed by assessee is directed against order passed by the learned CIT-II, Hyderabad, dt. 15th Dec, 2005 under s. 263 of the IT Act, 1961 (the Act) for the asst. yr. 2002-03. The assessee raised the following grounds :

"1. The order of the CIT(A)-II, Hyderabad, dt. 15th Dec, 2005 is contrary to law and facts of the case.

2. (a) The CIT grossly erred in law in holding that the assessment made on 14th March, 2005 under s. 143(3) of the Act allowing depreciation on goodwill is erroneous and prejudicial to the interests of Revenue and directing the AO to disallow depreciation on goodwill.

(b) The CIT ought to have seen that the said goodwill represents actual consideration paid over the value of assets taken over from Coastal Papers Ltd., and is an intangible asset coming within the definition provided under s. 32 of the Act and therefore depreciation is admissible.

(c) The CIT ought to have seen that the assessee furnished all the information regarding the claim of depreciation on goodwill before the AO and the AO after considering the assessee's submissions allowed depreciation on goodwill and therefore the CIT is not justified in directing the AO to disallow depreciation on goodwill.

3. (a) The CIT erred in law in directing the AO to disallow the fee paid to RoC for increase in authorized share capital on account of amalgamation.

(b) The CIT ought to have seen that amalgamation expenses including the fee paid to RoC for increase in authorized share capital is to be allowed as deduction and therefore the AO rightly allowed the deduction.

4. (a) The CIT erred in law in directing the AO to rework out the book profits under s. 115JB of the Act taking into account the revaluation reserve credited to P&L a/c as income.

(b) The CIT ought to have seen that the computation made under s. 115JB of the Act by the AO is correct and revaluation reserve credited to P&L a/c is to be reduced as per cl. (i) of Explanation to s. 115JB of the Act and therefore the book profits cannot be increased with the amount of revaluation reserve credited to P&L a/c.

5. For all the above grounds and such other grounds that may be urged at the time of hearing it is most respectfully prayed that this Hon'ble Tribunal may be pleased to allow the claims of the assessee."

2. The brief facts of the case are that the appellant is a public limited company. It filed its return of income for the asst. yr. 2002-03 on 31st Oct., 2002 disclosing a total income of 'nil' after set off of brought forward losses of Rs. 4,97,82,391 under the normal provisions and a book profit of Rs. 15,21,55,311 under s. 115JB of the Act. The case was taken up for scrutiny and notice under s. 143(2) was issued on 15th Oct., 2003 which was duly served on 23rd Oct., 2003. Subsequently, the case was posted several times by issue of notices. Details called for were filed by the assessee. The assessee has claimed deferred revenue expenses of Rs. 87,05,749 which were not debited to P&L a/c. However, no further details and supporting evidence was produced in respect of the same. Out of Rs. 87,05,749 only Rs." 35,46,032 thus only qualifies for deduction under s. 35DDA of the Act. The assessee company has provided for payment of interest of Rs. 1,73,33,598 in books on the royalty outstanding to the Government of Andhra Pradesh. Though the assessee company has made a provision in the books, it is contesting the same in Courts of law and having lost its case before the jurisdictional High Court, the assessee went in appeal to the Supreme Court, where the issue is yet to be decided. However for' the year under appeal similar claim of the assessee was not allowed by the AO. Further, the assessee has claimed deduction under s. 80HHC for Rs. 13,87,094. In doing so, the assessee has not included 'excise duty' of Rs. 41,56,00.403 on goods sold while computing the 'total turnover'. The AO observed that the assessee has not deducted 90 per cent of 'other income' credited to the P&L a/c amounting to Rs. 4,32,54,000. For the purpose of computing 'total turnover' 'excise duty' collected on sales is also to be included. The AO thus recomputed the claim under s. 80HHC. The AO determined, the income of the assessee at 'nil'. However, book profit was determined at Rs. 16,58,43,085 and same was brought into tax. The CIT on going through assessment order found that in respect of sale of land and building relating to the Coastal Paper Ltd. unit at Kadiam for Rs. 1.35 crores, while the sale proceeds allocated to the building portion has been adjusted against the WDV of the block assets, in respect of the amount allocable to sale of land, capital gain has not been computed in accordance with the provisions of ss. 45 and 48 of the Act. Further, an amount of Rs. 4,83,49,178 was claimed as depreciation at 25 per cent on a goodwill of Rs. 19,33,96,711 recognised in the books of account at the time of amalgamation being the excess of actual consideration paid by the Andhra Pradesh Papers Mills Ltd. (APPML) over and above the net assets over liabilities of the erstwhile Coastal Paper Ltd. (CPL). The AO incorrectly allowed the same goodwill. According to the CIT the AO wrongly allowed the depreciation on goodwill though it is not included in Part B of Appendix 1, r. 5 of the IT Rules as an "intangible asset" eligible for depreciation and recognition of goodwill on amalgamation is not in accordance with any recognized principles of accountancy. The losses of CPL have been separately allowed in accordance with the provisions of s. 72A of the Act and as such, the recognition of the net liabilities over assets of CPL (which is nothing but accumulated losses) as goodwill and claiming of deduction by way of depreciation amounts to double deduction. Further, the AO should not have allowed the amount incurred for increasing the authorized capital from Rs. 20 crores to Rs. 23.75 crores as an expenditure being capital expenditure. Further, the book profit under s. 115JB has not been computed correctly in as much as "transfer from revaluation reserve" has not been examined properly from point of view of admissibility. As this order of the AO was found to be erroneous and prejudicial to the interests of Revenue on account of the above issues, the learned CIT-II has invoked his powers under s. 263 of the Act and directed the AO to redo the assessment as per his directions. As against this order of the CIT, the assessee is in appeal before us.

3. The learned counsel for the assessee submitted that the assessee company acquired the undertaking of CPL under a scheme of amalgamation approved by the High Court of Andhra Pradesh. The scheme is effective from 1st Oct., 2000. The assessee APPML is described as a transferee company' while CPL has been described as a 'transferor company'. The consideration for acquiring the aforesaid undertaking was Rs. 2,650.92 lakhs which includes taking over of the entire assets at Rs. .10,488.95 lakhs and the liability amounting to Rs. 9,772 lakhs. An amount of Rs. 1,933.97 lakhs was debited in the accounts as for goodwill. On this amount the assessee had claimed depreciation at 25 per cent amounting to Rs. 4,83,49,178 which was allowed by the AO in the proceedings under s. 143(3) of the Act. Subsequently, the CIT, Hyderabad-II vide his order under s. 263 to disallow the allowance of depreciation as it amounted to double deduction by observing as under :

"An amount of Rs. 4,83,49,178 was claimed as depreciation at 25 per cent on a goodwill of Rs. 19,33,96,711 recognised in the books of account at the time of amalgamation being the excess of actual consideration paid by the APPML over and above the net assets over liabilities of the erstwhile CPL. The AO incorrectly allowed the same. Goodwill is not included in Part B of Appendix I, r. 5 of the IT Rules as an 'intangible asset' eligible for depreciation. Recognition of goodwill on amalgamation is not in accordance with any recognized principle of accountancy. The losses of CPL have been separately allowed in accordance with the provisions of s. 72A of the IT Act and as such the recognition of the net liabilities over assets of CPL which is nothing but accumulated losses as goodwill and claiming of a deduction by way of depreciation amounts to a double deduction."

4. He submitted that the business valuation of the undertaking of CPL was done by the IDBI, Mumbai which was having an expertise in this field. The difference between the assets valuation made by the IDBI and net value of assets taken over represented intangible assets and, therefore, considered as goodwill in the books of accounts in accordance with accepted accounting principles. It was submitted that s. 32 of the Act allows depreciation not only in respect of tangible assets but also in respect of intangible assets such as know-how, patents, copyrights, trade marks, licences, franchise or any other business or commercial rights of similar nature. It is submitted that the sum of Rs. 1,933.97 lakhs represented the intangible assets in the form of commercial rights falling under the provisions of s. 32 of the Act and consequently the depreciation was rightly allowed by the AO at 25 per cent. Regarding the setting off of brought forward losses of the merged company under s. 72A of the Act, it was submitted that there was no double deduction since the consideration paid for acquiring of a business undertaking depends on many circumstances like nature of business profitability, location, etc. and brought forward losses and depreciation available for setting off under s. 72A of the Act could only be one of the considerations but no unit will be bought solely for the reason of availability of the brought forward losses unless the unit has got potentiality as a business venture.

4.1 It was submitted by the learned counsel for the assessee that the CIT was of the view that the order of the AO allowing depreciation was erroneous as well as prejudicial to the interests of the Revenue by observing as under :

(i)Under the scheme, the assessee became the owner of the assets of the erstwhile CPL w.e.f. 1st Oct, 2000 as well as became liable for the liability of the CPL. Thus, there was no purchase of the undertaking of the paper mill of the CPL for any consideration.

(ii)Under the scheme which is a case of amalgamation of CPL with the assessee company and is not a case of purchase or take over of certain assets of CPL for the reason that in the case of amalgamation the assets and the liability of the transferor company becomes a part of the assets and liability of the transferee company with effect from the effective date.

(iii)In fact, the difference between the assets and liabilities taken over represents accumulated losses of the transferor company which are to be allowed as set off under s. 72A of the Act.

(iv)The computation of the goodwill adopted by the assessee is neither recognized nor a prescribed practice and hence cannot be accepted. Thus, the acceptance of the recognition of the goodwill in the books of account at the time of amalgamation is an error and consequently the AO should not have accepted such a treatment. Hence, he should not have allowed depreciation on such incorrectly recognized goodwill.

(v)Without prejudice to the above, the goodwill could not be considered as intangible assets like know-how, copyrights, patents, trade marks, franchise or any other business or commercial rights. Hence, the depreciation could not have been allowed.

(vi)Further, the actual cost of the goodwill to the CPL was 'nil' and, therefore, the cost of goodwill to the assessee consequent upon amalgamation would also be 'nil' and, therefore, even on this ground also the depreciation could not be allowed.

4.2 He submitted that the order of the AO in allowing the depreciation on the goodwill cannot be said to be erroneous insofar as it is prejudicial to the interests of the Revenue on the reason that cl. 1A of the scheme of amalgamation provides that what is transferred is the undertaking of the CPL which comprised of not only all the assets and properties of the CPL but also the intangible assets comprising of all the rights, privileges, licenses and liberties, rebates, trade marks import quotas, tax relief and concessions, tax incentives and entitlements, tax benefits etc. held by the CPL before the effective date of the amalgamation. Further, it takes over the liabilities of the CPL. This is apparent from cl. 1A of the scheme itself. Therefore, it cannot be said that it is not a case of transfer of the undertaking and is mere a case of amalgamation of one company into the other. Certainly the amalgamation involves transfer of the entire business of the undertaking and, therefore, the CIT could not draw any adverse inference on this account. Further, he submitted that the consideration paid by the assessee was only for the assets, tangible or intangible held by the CPL as well as the liabilities owned by the CPL. Nothing more or nothing less. Such assets admittedly did not include any goodwill as is apparent from the assets of CPL acquired by or by merger with the assessee company. Therefore, there was no transfer of assets in the name of goodwill. The CIT in para 4.8 of the impugned order himself has accepted this position which is quoted below :

"4.8 Thus, acceptance of the recognition of goodwill in the books of account at the time of amalgamation is an error. The AO should not have accepted such a treatment. Consequently, he should not have allowed depreciation on such incorrectly recognized goodwill. Thus, the order of the AO is erroneous and prejudicial to the interest of Revenue."

4.3 He submitted that, therefore, the correct legal/factual position is that there was no transfer of goodwill under the scheme of amalgamation. The entries in the books of accounts or the nomenclature given to a particular set of affairs in the books of accounts is irrelevant. If one goes by the substance of the matter, the consideration paid only represents the tangible or intangible assets held by the CPL which certainly did not include the goodwill. Therefore, the consideration paid by the assessee was either for the tangible assets or intangible assets. Clause 1c of the scheme includes all rights, privileges, license's and liberties, patients, trade marks, import quotas, tax relief and concessions, tax incentives etc. which falls under the amended definition of s. 32 of the Act which is being reproduced as under :

"32 (1) In respect of depreciation of:

(i) buildings, machinery, plant or furniture, being tangible assets.

(ii) Know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed . . ., "

5. The learned counsel for the assessee submitted that the CIT was not correct in giving a direction to the AO to disallow the claim of depreciation in this regard. He further submitted that considering the scheme of amalgamation and the amended definition of s. 32, the assessee was entitled to claim depreciation as per rules. The learned counsel submitted that the CIT was wrong in observing that the excess consideration represents the accumulated losses of CPL and, therefore, it was a case of double deduction. There is no basis for such assumption. Once there is transfer of assets and liabilities of a company as per the scheme of amalgamation approved by the High Court the question does not arise for attributing the consideration for a thing which does not find place in the scheme itself. Clause (1) of the scheme specifically points out the assets and properties which were transferred and there is no reference to the accumulated losses of the transferor company. Hence, the question of attributing the consideration paid towards accumulated losses does not arise.

5.1 Further he submitted that the CIT on one hand holds that there was no transfer of goodwill while on the other hand, he observes that goodwill does not find place in the amended provisions of s. 32 of the Act. Having held that difference between the assets over the liabilities could not be treated as goodwill, the only finding which could be given by the CIT should have been that it represented the value of the assets tangible or intangible held by the CPL. It was thus submitted by the assessee's counsel that the CIT cannot hold that the assessee was not entitled to depreciation on the intangibles.

5.2 It was further submitted by the learned counsel for the assessee that it is settled legal position that if two views are possible and the AO accepts one of the views, then the CIT cannot take recourse to invoke the provisions of s. 263 of the Act. The assessee's counsel relied on the judgment of the Bombay High Court in the case of Commissioner Of Income-Tax v. Gabriel India Ltd. [1993] 114 CTR (Bom) 81 : [1993] 203 ITR 108 (Bom) as well as the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 159 CTR (SC) 1 : [2000] 243 ITR 83 (SC), wherein it was held that an order of AO cannot be held to be prejudicial to the interest of the Revenue when he adopts one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the AO has taken one view with which the CIT does not agree. The view of the AO in the present case that goodwill can be said to be an intangible asset within the scope of s. 32 was a plausible view. Thus, the assessee's counsel vehemently opposed this view of the CIT and that depreciation was correctly allowed by the AO.

5.3 It was submitted that deduction under s. 72A of the Act is a statutory deduction which is to be allowed irrespective of the other permissible deduction under the Act and that it will not amount to double deduction. Assessee's counsel submitted that the CIT misconceived the word goodwill' in the accounts. It is trite law that the name given to a transaction is not material and that the sum and substance of the transaction was only required to be seen. He placed reliance on the aspect of 'nomenclature at pp. 99-100 under item No. 18 of Sampath Iyengar's Commentary on Income-tax 10th Edn., Vol. 1. Reliance was also placed for this purpose on the decisions of the apex Court in the case of Godrej & Co. v. CIT [1959] 37 ITR 381 (SC) and in the case of National Steel Works Ltd. v. CIT [1962] 46 ITR 646 (SC). He contended that at any rate a business or commercial right goes to enhance the goodwill of any business.

5.4 The learned counsel further submitted that the accounting treatment given in the books for a particular transaction is not decisive of the real nature of the transaction. For understanding any transaction all the facets of the transaction are required to be considered and assessed and on the mere ground that the assessee has accorded a particular accounting treatment to the transaction no proper or correct conclusion can be drawn on that basis alone. This is in terms of several authorities viz., K.S Narayanaswami Iyer…Applicant; v. Commissioner Of Income-Tax, Madras…. [1956] 29 ITR 515 (Mad), CIT v. Vasantha Mills Ltd. [1957] 32 ITR 237 (Mad) at 252, CIT v. Chamanlal Mangaldas & Co. [1960] 39 ITR 8 (SC), Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC) at 498, Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal 1973 CTR (SC) 44 : [1973] 87 ITR 542 (SC) and Sutlej Cotton Mills Ltd. v. CIT 1978 CTR (SC) 155 : [1979] 116 ITR 1 (SC) and many others.

6. It is now well settled through a catena of citations that the guidelines and Accounting Standards issued by the ICAI are required to be followed for the computation of income for tax purposes. He relied on the following judgments :

(1)J.K. Industries Ltd. v. Union of India [2007] 213 CTR (SC) 301 : [2008] 297 ITR 176 (SC);

(2)Commissioner Of Income Tax… v. Woodward Governor India Pvt. Ltd.…. [2007] 210 CTR (Del) 354 : [2007] 294 ITR 451 (Del);

(3)Commissioner Of Income-Tax v. South India Corporation (Agencies) Ltd. [2007] 293 ITR 237 (Mad);

(4)CIT v. Shri Ram Honda Power Equip & Ors. [2007] 207 CTR (Del) 689 : [2007] 289 ITR 475 (Del) at 502;

(5)CIT v. Indo Nippon Chemical Co. Ltd. [2000] 164 CTR (Bom) 78 : [2000] 245 ITR 384 (Bom);

(6)CCE v. Dai Ichi Karkaria Ltd. [1999] 156 CTR (SC) 172;

7. He also relied on following orders of the Tribunal :

(a)Oil & Natural Gas Corpn. Ltd. v. Dy. CIT [2002] 77 TTJ (Del)(SB) 387 : [2003] 261 ITR 1 (Del)(SB)(AT);

(b)Jt. CIT v. Pact Securities & Financial Ltd. [2003] 86 ITD 115 (Hyd);

(c)Shri Dinesh Mills Ltd. v. Asstt. CIT [2001] 72 TTJ (Ahd) 990 : [2000] 72 ITD 110(Ahd);

(d)M.N. Dastur & Co. Ltd. v. Dy. CIT [1997] 61 ITD 167 (Cal).

7.1 On the treatment of intangible assets in the accounts, the learned counsel for the assessee submitted that the ICAI, New Delhi has issued clear and categorical guidelines. The institute has stated that the two methods are available for the purpose of reckoning the same. They are the pooling method and the purchase method. So far as the pooling method is considered the institute has prescribed a set of conditionality and one of the essential conditionality is as extracted by the learned CIT himself in the impugned order at p. 7 para 4.5, which provides the method of computation for the applicability or otherwise of the pooling method. In terms of the calculations as given, it will be apparent that the pooling method does not apply to the present transaction at all and that by default it will be the purchase method that will become automatically applicable and if it is purchase method that is to be applied then the write off as claimed and permitted by the learned AO cannot be faulted with and dubbed as erroneous and prejudicial. The acquisition of CPL by the assessee was for the purpose of business synergies and for ousting neighbourhood competition. The CPL had innumerable advantages and facilities all of which cannot be identified and listed head by head or item by item. The consideration paid for purchase of CPL was a total consideration due for a 'going concern'.

7.2 The learned counsel for the assessee submitted that with regard to capital gain on sale of land that the assessee company had brought forward capital loss of Rs. 2,82,26,900 as already mentioned in the computation of income and the capital gain earned during this year on sale of land is to be set off against such brought forward capital loss and balance brought forward loss is to be carried forward.

7.3 Regarding the issue of payment of fees to RoC for enhancement of authorized capital the learned counsel for the assessee submitted that it paid Rs. 1,87,500 to increase authorized capital from Rs. 20 crores to Rs. 23.75 crores. The said amount was included in rates and taxes and charged to P&L a/c and the same was not considered for disallowance while computing taxable income by oversight. Regarding claim of amalgamation expenses, it is submitted that the assessee incurred Rs. 34.09 lacs towards acquisition expenses which were considered as part of the acquisition cost of Rs. 2,592.92 lacs. He submitted that the assessee has charged to profit and loss Rs. 14.99 lacs, being the expenditure incurred towards printing and stationery, consultancy charges towards amalgamation. Finally, he submitted that the CIT has no jurisdiction to give direction to initiate the penalty proceedings under s. 271(1)(c) of the IT Act when he himself has no power to initiate this penalty proceedings.

8. The learned Departmental Representative submitted that facts of the case are that the CPL was an independent listed company upto 30th Sept., 2000. The assessee acquired 30,60,000 shares of CPL at Rs. 60 from the promoters of CPL for a consideration of Rs. 18.36 crores. The assessee company made an offer to non-promoter shareholders of CPL and acquired 12 lakh more shares at a cost of Rs. 7.2 crores. On acquiring 42.6 lakh shares of CPL which constitute approximately about 60 per cent of the shares of CPL, CPL became subsidiary of the assessee company. The assessee through valid proceedings under Companies Act with the approval of shareholders of the assessee company as well as CPL and with the approval of Hon'ble High Court of Andhra Pradesh amalgamated CPL with itself and the remaining shareholders of CPL were allotted shares of the assessee company in the ratio 3:1. Consequent on such amalgamation, CPL lost its identity and got merged with the assessee. The learned Departmental Representative submitted that thus, the assessee became the owner of the assets of the erstwhile CPL on CPL being amalgamated with the assessee w.e.f. 1st Oct., 2000. Similarly, the assessee has also become liable for the liabilities of CPL. From this, it may be seen that there was no purchase of the undertaking of the paper mill of CPL for any consideration. The company, CPL, got amalgamated with the assessee. In this scheme framed by the two companies and approved by the Hon'ble High Court, the manner of dealing with the liabilities and assets has been categorically laid down. Para 2 of the High Court's order lays down that all the property, rights and powers of the transferor company specified in the scheme of amalgamation and all other property rights and powers of the transferor company be transferred without any further act or deed to the transferee company and vest with the transferee company. Similarly, all the liabilities and duties of the transferor company were to be transferred to the assessee company without any further act or deed. Thus, this is a case of amalgamation of CPL with the assessee company and it is not a case of purchase or takeover of certain assets of CPL. In the case of amalgamation, the assets and liabilities of the transferor company become part of the assets and liabilities of the transferee company with effect from effective date.

8.1 He drew our attention to the AS-14 issued by ICAI, New Delhi and submitted that it recognizes that two methods of accounting of amalgamation, viz.,

(i)Pooling of interest method;

(ii)the purchase method.

8.2 He submitted that pooling of interest is to be adopted in case of amalgamation in the nature of merger, satisfying the following conditions :

(i)All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii)Shareholders holding not less than 90 per cent of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

(iii)The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

(iv)The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v)No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

9. The learned Departmental Representative submitted that in the instant case of amalgamation of CPL with the assessee, all the above conditions were satisfied. All the shareholders of CPL as on the date of amalgamation were paid by way of issue of shares of the assessee. The assessee itself owning more than 60 per cent of shares of CPL, the transferor company, which were cancelled and the remaining shareholders were issued shares of the assessee company. In preparing the transferee company's financial statements under the pooling of interest method, the assets, liabilities and reserves whether capital or revenue or arising on revaluation of the transferor company should be recorded at their existing carrying amounts on the same form as at the date of the amalgamation. The balance of the P&L a/c of the transferor company should be aggregated with the corresponding balance of the transferee company transferred to general reserves, if any. The difference between the amount recorded as share capital issued plus additional consideration in the form of cash or other assets and the amount of share capital of the transferor company should be adjusted in reserves. The learned Departmental Representative contended that it is universally accepted and prescribed practice of the treatment to be given to the assets and liabilities on account of amalgamation, the question of recognizing' any goodwill at the time of amalgamation representing the difference between the assets and liabilities does not arise. In fact, the difference between the assets and liabilities taken over, represents the accumulated losses of the transferor company. The losses are to be adjusted in the manner as explained above. As far as the taxation is concerned, the manner of giving effect to the brought forward losses is dealt with under s. 72A and the assessee has duly taken advantage of the same. Thus, recognizing the difference between the net assets and liabilities and deducting it from the notional consideration paid for the acquisition of the shares of CPL and treating the difference as goodwill and as an asset is erroneous and is not recognized by any legal proposition. The computation of goodwill adopted by the assessee is neither a recognized nor prescribed practice and hence cannot be accepted. Thus, acceptance of the recognition of goodwill in the account at the time of amalgamation is an error. The AO should not have accepted such a treatment. Consequently, he should not have allowed depreciation on such incorrectly recognized goodwill. Thus, the order of the AO is erroneous and prejudicial to the interests of Revenue.

10. The learned Departmental Representative contended that without prejudice to the contention that on amalgamation, the net of assets over liabilities should have been recognized on goodwill, depreciation permitted @ 25 per cent on intangible assets does not include goodwill. Intangible assets include such assets like know-how, patents, copyrights, trade marks, franchises or any other business or commercial activity (sic—rights). In the instant case, the difference between the assets and liabilities of Rs. 19.33 crores is not of the nature of know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights. As such, no depreciation could have been allowed on this sum recognized in the books as goodwill.

10.1 The learned Departmental Representative submitted that without prejudice to the above, depreciation, if any, is to be allowed on goodwill, such depreciation has to be allowed on cost or WDV, as the case may be. Actual cost has been defined in s. 43(1). " 'Actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof....". Explanation 7 to s. 43(1) lays down that wherein a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be same as it should have been if the amalgamated company had continued to hold the capital asset for the purpose of its own business. In the instant case, the actual cost of goodwill to CPL is nil. As such, the cost of goodwill to the assessee consequent on the amalgamation will also be nil being the cost to CPL. Since the actual cost of goodwill is nil, the amount admissible as depreciation on such goodwill is also nil. The AO grossly erred in not invoking these provisions resulting in an order erroneous and prejudicial to the interest of Revenue. The learned Departmental Representative submitted that without prejudice to the above, even if any goodwill is to be recognized, it was to be recognized in the asst. yr. 2001-02 relevant to the previous year ended on 31st March, 2001 as the amalgamation became effective w.e.f. 1st Oct., 2000 itself. It was thus submitted that the AO has grossly erred in allowing depreciation on the amount, termed as goodwill. He prayed for confirmation of the order of the CIT on this issue.

10.2 Regarding expenditure at raising the capital it is not allowable and he relied on the judgment of Hon'ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT [1997] 140 CTR (SC) 598 : [1997] 225 ITR 798 (SC)

10.3 Regarding computation of book profit and the treatment to be given regarding the depreciation relatable to the revaluation of the assets, he submitted that the book profit under s. 115JB is to be computed in accordance with the cl. ( g) to Expln. 1 to s. 115JB which has been inserted w.e.f 1st April, 2007 as per which there should be exclusion of depreciation relating to the revaluation of the assets.

11. We have heard both sides and perused the material on record. In the present case, the assessee acquired 42,60,000 of equity shares of Rs. 10 each of CPL representing 71 per cent equity share capital. With the said acquisition, CPL became a subsidiary of the company. The object of acquisition of CPL by the company was to facilitate synergized operations between both the companies and also to consolidate its market share in the paper industry with a diversified product range of newsprint.

11.1 As the company and CPL are engaged in the similar line of manufacture, it was proposed to amalgamate CPL with the company w.e.f. 1st Oct., 2000 so that the amalgamation will result in the combined operations being carried on more advantageously and also economically and efficiently. The board of directors of the company met on 31st Jan., 2001 and announced an exchange ratio of 1 : 3 for the amalgamation of CPL with the APPML. The scheme was subsequently approved by the shareholders of both APPML and CPL on 26th March, 2001 at the respective meetings of the equity shareholders convened as per the directions of the Hon'ble High Court of Andhra Pradesh. The amalgamation proceedings are in the progress in the High Court of Andhra Pradesh. The assessee got approval from the Hon'ble High Court of Andhra Pradesh vide order dt. 27th Aug., 2001 w.e.f. 1st Oct., 2000. By the time High Court order was received, the annual account for the financial year 2000-01 was finalized and the effect could not be given in the accounts for the financial year 2000-01 but since the date of filing the IT return was not yet over, effect was given in the income-tax statement. The effect was given in the books of accounts of the assessee in the financial year 2001-02 relevant to the asst. yr. 2002-03. As per scheme of amalgamation assessee company has taken over the assets of CLP company at Rs. 10,488.95 lacs and liability of Rs. 9,772 lacs' for which assessee paid consideration of Rs. 2,590.92 lacs. Though the assessee has taken the net assets at Rs. 716.95 lacs, it has paid Rs. 2,590.92 lacs. This difference i.e., excess consideration represents the goodwill at Rs. 1,933.97 lacs as per argument of the assessee's counsel. This goodwill valuation was done by the IDBI, Mumbai, which was having expertise knowledge in this field. The amalgamation has been accounted for under pooling of interest method as prescribed by the AS-14 issued by the ICAI. Accordingly, assets and liabilities and other reserves of CPL as on 1st Oct., 2000 have been taken at their book values. The excess of liabilities over assets taken over from the CPL amounting to Rs. 1,933.97 lacs has been taken to goodwill account, which is amortized over a period of 10 years from the current financial year. Now the contention of the assessee's counsel is that the assessee wrongly followed the pooling of interest method instead of purchase method. Relevant paras of AS-14 are reproduced below :

"28. An amalgamation may be either

(a)an amalgamation in the nature of merger, or

(b)an amalgamation in the nature of purchase.

29. An amalgamation should be considered to be an amalgamation in the nature of merger when all the following conditions are satisfied :

(i)All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.

(ii)Shareholders holding not less than 90 per cent of the face value of the equity shares of the transferor company (other than equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.

(iii)The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares.

(iv)The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.

(v)No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.

30. An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or more of the conditions certified in para 29 is not satisfied.

31. When an amalgamation is considered to be an amalgamation in the nature of merger, it should be accounted for under the pooling of interests method described in paras 33-35.

32. When an amalgamation is considered to be an amalgamation in the nature of purchase, it should be accounted for under the purchase method described in paras 36-39.

The pooling of interests method

33. In preparing the transferee company's financial statements, the assets, liabilities and reserves (whether capital or revenue or arising on revaluation) of the transferor company should be recorded at their existing carrying amounts and in the same form as at the date of amalgamation. The balance of the P&L a/c of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to the general reserve if any.

34. If, at the time of amalgamation, the transferor and the transferee companies have conflicting accounting policies, a uniform set of accounting policies should be adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies should be reported in accordance with AS-5 "Prior Period and Extraordinary Items and Changes in Accounting Policies".

35. The difference between the amount recorded as share capital issued (plus any additional consideration in the form of cash or other assets) and the amount of share capital of the transferor company should be adjusted in reserves.

The purchase method

36. In preparing the transferee company's financial statements, the assets and liabilities of the transferor company should be incorporated at their existing carrying amounts or, alternatively, the consideration should be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of amalgamation. The reserves (whether capital or revenue or existing on revaluation) of the transferor company, other than the statutory reserves, should not be included in the financial statements of the transferee company except as stated in para 39.

37. Any excess of the amount of the consideration over the value of the net assets of the transferor company acquired by the transferee company should be recognized in the transferee company's financial statements as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of the net assets acquired, the difference should be treated as capital reserve.

38. The goodwill arising an amalgamation should be amortized to income on a systematic basis over its useful life. The authorization period should not exceed five years unless a somewhat longer period can be justified.

39. Where the requirements of the relevant statute for recording the statutory reserves in the books of transferee company are complied with, statutory reserves of the transferor company should be recorded in the financial statements of the transferee company. The corresponding debit should be given to a suitable account head (e.g. amalgamation adjustment account) which should be disclosed as a part of 'miscellaneous expenditure' or other similar category in the balance sheet. When the identify of the statutory reserves is no longer required to be maintained, both the reserves and the aforesaid account should be reversed."

11.2 As per AS-14, pooling of interest method is applicable if the amalgamation is in the nature of merger which should satisfy four prescribed conditions stated in para 29 of AS-14. Condition No. 2 states as follows :

"Shareholders holding not less than 90 per cent of the face value of the equity shares of the transferor company (other than equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation."

12. In the present case, APPM had acquired 42,60,000 shares and transfer took place on 13th Dec, 2000 and 14th Dec, 2000 respectively. The transfer date of scheme of amalgamation was 1st Oct., 2000 and as on the date. APPM does not hold any shares on 1st Oct., 2000. When the final accounts for the year ended 31st March. 2002 were drawn up, the amalgamation was completed in all respects though numbers as on 31st March, 2001 which is the previous year relevant to the assessment year. For income-tax purpose, a strict technical compliance is contemplated and the conditions stated above were not fulfilled, the amalgamation has to be considered under purchase method. To meet the conditions prescribed for pooling interest method, shareholders representing 54,00,000 shares (90 per cent of 60 lacs) would have been offered shares in APPM i.e., 18,00,000 shares of APPM could have been issued to erstwhile shareholders of CPL in the ratio of 3 : 1. However, only 5,80,000 shares were issued. Therefore, the condition prescribed under pooling of interest method was not complied with, the condition laid down in cl. 29(ii) of AS-14 as such, cl. 30 of the AS-14 is applicable. Therefore, in our opinion, amalgamation will be under purchase method and the excess consideration of Rs. 1,933.97 lacs is to be treated as goodwill and should be amortized over the period of useful life. Now the contention of the assessee is that he wrongly followed the 'pooling method' instead of 'purchase method' and entry in the books of account is not conclusive and the Department was not entitled to take the book keeping entries as evidence. For that purpose he relied on the judgment of Supreme Court in the case of CIT v. Mugneeram Bangur & Co. ( Land Department) [1965] 57 ITR 299 (SC). Further contention that substance of the situation is to be seen rather than form. For this purpose, reliance was placed on the following judgments :

"Kedarnath Jute Mfg. Co. Ltd. v . CIT [1971] 82 ITR 363 (SC), wherein it was held whether the assessee is entitled to a particular deduction or not will depend upon the provisions of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entry in his books of account be decisive or conclusive in the matter."

In Sutlej Cotton Mills Ltd. v. CIT (supra ), it was held as follows :

"It is now well-settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee."

13. In our opinion, in view of the above judgment, the concept of materiality (substance) is threshold for recognition of transaction in accounting process.

14. The contentions of the Department is that there is no goodwill in this case. Goodwill basically is reputation. There can be no sale of a goodwill without the business associated with that goodwill or the name. From that point of view, goodwill has no separate existence apart from business. One cannot sell the goodwill and retain the business that the goodwill represented, nor can one sell the business and retain the goodwill. Goodwill has no independent existence. It cannot subsist by itself. It must be attached to business. Reliance is placed on judgment of Calcutta High Court in the case of CIT v. Chunilal Prabhudas & Co. [1970] 76 ITR 566 (Col). In the case of Cit v. B.C Srinivasa Setty. [1981] 21 CTR (SC) 138 : [1981] 128 ITR 294 (SC) it was held that :

"Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Crullwell v. Lye [1810] 17 Ves. 335 that goodwill was nothing more than the probability that the old customers would resort to the old places was expanded by Wood V.C. in Churton v. Douglas [1859] John 174 to encompass every positive advantage 'that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on or with the name of the old firm, or with any Other matter carrying with it the benefit of the business'. In Trego v. Hunt [1896] AC 7 (HL) Lord Herschell described goodwill as a connection which tended to become permanent because of habit or otherwise. The benefit to the business varies with the nature of the business and also from one business to another. No business commenced for the first time possesses goodwill from the start. It is generated as the business is carried on and may be augmented with the passage of time. Lawson in his introduction to the law of property describes it as property of a highly peculiar kind. In CIT v. Chunilal Prabhudas & Co. [1970] 76 ITR 566 (Cal) the Calcutta High Court reviewed the different approaches to the concept.

It has been horticultural and botanically viewed as a seed sprouting or an acorn growing into the mighty oak of goodwill. It has been geographically described by locality. It has been historically explained as growing and crystallizing traditions in the business. It has been described in terms of a magnet as the 'attracting force'. In terms of comparative dynanamics, goodwill has been described as the 'differential return of profit'. Philosophically it has been held to be intangible. Though immaterial, it is materially valued. Physically and psychologically it is a habit and sociologically it is a 'custom'. Biologically, it has been described by Lord Macnaghten in Trego v. Hunt [1896] AC 7 (HL) as the 'sap and life' of the business. Architecturally, it has been described as the 'cement' binding together the business and its assets as a whole and a going and developing concern."